Banks Versus Fintechs: Who Is Ahead On Product?

14 October 2020

I concluded in Why Banks Will Never Catch Up With Fintechs On UX that Banks will arguably not be able to catch up with Fintechs in terms of the User Experience of their websites and apps.

(Definition of Bank and Fintech, and the difference between the two, are explained in my glossary here.)

That post was about the UX of a Financial Services Product.

This post is about the Product itself.

Over time, banks have created a wide array of innovative products like ATM, Credit Card, CDO2, CDS, HFT and UPI.

Compared to that, I haven’t come across any pathbreaking products from neobanks.

Ron Shevlin, Director of Research at Cornerstone Advisors, pointed me to a couple of novel products from fintechs (though not neobanks):

  1. Automated savings e.g. Acorns, Digit
  2. Bill negotiation e.g. Billshark, Trim

Let me weigh in on these two product categories.

Automated Savings

In the mid 1980s, Citibank India launched “Unfixed Deposit”. This product swept excess amount in a savings account to a higher-yield fixed deposit, which could then be broken in small units if the customer needed cash before the FD matured. Around ten years later, ICICI Bank launched a Bank Account product called Quantum Optima, which sweeps amounts above a preset balance in a savings account to an FD yielding higher interest rate.

In contrast, when I was in UK and Germany, I had to manually track my checking accounts and remember to move surplus funds to savings accounts (or lose interest if I forgot). Going by Ron Shevlin, American banks still don’t do auto sweeps.

Against this backdrop, I’ll concede that Automated Savings is an innovative product from fintechs, but only in the West – because banks have offered it in India since before the term “fintech” was even coined (avant la lettre).

(For readers outside India, here’s a clarification: “Savings account” is the basic bank account for individuals in India, where current account is issued only to businesses. So, whenever you read “savings account” in the Indian context, replace it with you’d call a “DDA”, “checking account” or “bank account”.)

Bill Negotiation

Over the years, I’ve come across a plethora of companies that negotiate prices for airline tickets, ecommerce products, and so on. Nobody calls them fintechs. By the same logic, negotiating a cheaper mobile phone plan with my TELCO shouldn’t be in the realm of financial services.

Therefore, I won’t treat Billshark and Trim – and one more Mumbai-based startup that was planning to launch a similar service in India a few years ago – as fintechs.

It’s moot whether banks have a product in this space or not.

While I expect more fintechs to launch credit card, they’d only be catching up with banks on this product. Bank of America launched the first ever credit card in Fresno, California, in 1958.

Going by the above examples, I was about to conclude that banks are ahead of fintechs on product.

Then I read an interview with Reid Hoffman in an HBR article entitled Blitzscaling.

Most of us know Hoffman as the cofounder of LinkedIn but, before that, he was one of the cofounders of PayPal aka member of the famous “PayPal Mafia”, which also includes many Silicon Valley celebs like Elon Musk (Tesla, SpaceX), Max Levchin (Affirm), and Peter Thiel (Palantir).

Reid Hoffman is also the creator of the Blitzscaling growth framework, which he defines as follows:

Blitzscaling is what you do when you need to grow really, really quickly. It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale.

In this interview, Hoffman explains why banks would never have invented a PayPal.

…freedom from normal rules is what gives you competitive advantage. For example, if we had understood how pernicious credit card fraud and chargebacks were in the early days at PayPal, I’m not sure we would have believed that such a service could be successful. We didn’t realize how staggering the losses could be. All the banking people knew the rules – you had to protect against fraud first. That prevented them from trying anything that looked remotely like PayPal.

Hoffman tries to sound self-effacing by attributing the success of PayPal to ignorance of rules, thereby stoking the mystique of a bunch of guys who started out in a Silicon Valley garage with a mission to the make the world a better place and didn’t let anything stop them in their missionary zeal.

But there’s more to it than that.

In an interview with Slate, the Founder CEO of Simple, a neobank, hinted that PayPal may have broken some rules, then used the blitzscaling strategy to grow rapidly, and reach the stage when it became too big to have to comply.

Banking is a highly regulated industry. Banks won’t break the law – at least not to create innovative products (or deliver superior customer experience).

(Of course, banks don’t suffer from any such inhibition when it comes to making money for themselves and their shareholders. If you need any convincing on that count, check out the latest Buzzfeed News / ICIJ expose.)

In my blog post entitled Fintechs Need Marketers And Lobbyists – Not Lawyers, I introduced the term “regulatory gap” to highlight areas that lie in the twilight zone between “Not Legal” and “Not Illegal”, where:

  1. “Not Legal” means there’s no law on it.
  2. “Not Illegal” means it does not violate any existing laws.
  3. “Not Illegal” does not mean “Legal” and “Not Legal” does not mean “Illegal”.

No financial services regulator is likely to bless a product that lies in the twilight zone between “Not Legal” and “Not Illegal”.

Accordingly, no mainstream bank will go near such a product. Cryptocurrency is a recent example.

Therefore, banks trail fintechs on products that leverage regulatory gaps. But they’re ahead of fintechs on all other types of financial services products.

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